MICRO, SMALL AND MEDIUM ENTERPRISES

DEVELOPMENT ACT, 2006

Micro, Small and Medium enterprises are crucial for the growth and development of an
economy, especially for developing economies like ours. The contribution of MSMEs to the
Gross Domestic Product (GDP) of our country is 30 per cent. They contribute about 40 per
cent to the overall exports of India.

Governments support business enterprises to facilitate industrial and trade activities. Micro,
Small, and Medium Enterprises (MSMEs) deserve special attention. In spite of being small
investment enterprises, MSMEs may contribute significantly to the economic development of
the country. Over the last five decades, the Micro, Small, and Medium Enterprises (MSME)
sector has emerged as one of the most dynamic and vibrant sectors of the Indian economy. By
fostering entrepreneurship and creating large employment opportunities at relatively low
capital costs, the sector contributes considerably to the country's economic and social
development. As ancillary units, MSMEs are complementary to large industrial sectors and
they contribute greatly to the inclusive industrial development of the nation. MSMEs are
broadening their reach across several sectors of the economy, producing a multitude of products
and services to meet the needs of the global as well as domestic markets.

Role of MSMEs in Economic Development

Employment opportunities: MSMEs create employment opportunities for people at large at

a comparatively lower cost of capital. In an economy like ours where unemployment and
underemployment pose a big challenge. MSMEs are crucial for us as the government alone
cannot provide employment opportunities to the people.

Optimum utilisation of resources: MSMEs make proper and optimum utilisation of the local
resources available such as land and buildings, human resources, raw materials etc. in the
society which may remain idle otherwise.

Balanced regional growth: Micro and small enterprises are scattered across the length and
breadth of the country which enables balanced regional growth.

Rural Development: MSMEs contribution in the rural areas has been tremendous. It uses local
available resources that lead to the socio-economic development of rural areas.
MSMEs have also contributed to the development of the handicraft industry, labour intensive
industries, and export sector. It also helped in the empowerment of local people, have made
India self-sufficient through emphasise on the production and use of swadeshi products, have
increased rural-urban interaction and self-employment.

Considering the role of MSMEs in the economic development of our nation, the government
is paying great attention to MSMEs. To assist the MSMEs and help them to scale up, the
Ministry of Micro, Small and Medium Enterprises (M/o MSME) was formed in 2007 by
merging the Ministry of Small Scale Industries and the Ministry of Agro and Rural Industries.

With a view to boost the development of small enterprises in the country, the Government of
India has enacted Micro Small and Medium Enterprises Development (MSMED) Act,
2006. Through MSMED Act, 2006 the Government aims to facilitate the growth of these
enterprises as well as boost their competitiveness.

MSMED ACT, 2006

Different stakeholders from time to time have emphasized that the small business sector had a
long need for a comprehensive Act for the development and regulation of small enterprises in
order to free themselves from the plethora of laws and regulations. Further, committees such
as the Abid Hussain Committee (1997) and Study Group under Dr. S.P. Gupta have made
recommendations to provide a proper legal framework for small business to relieve it of the
burden of complying with multiple rules and regulations. Although small scale manufacturing
industries have continued to be important for the economy, in the past few years, small scale
services have also emerged as a substantial sector that contributes substantially to the economy
and employs millions of workers. Therefore, in accordance with worldwide practice, it became
necessary to combine the concerns of manufacturing and services together and identify them
as a composite sector.

An economy like India, which is experiencing rapid growth, requires policy interventions and
a legal infrastructure that facilitates the development of small-scale business enterprises. With
these objectives in view, the Government came up with an exclusive legislation for micro, small
and medium enterprises known as the Micro, Small and Medium Enterprises Development Act,
2006.

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is an act
to provide for facilitating the promotion and development and enhancing the
competitiveness of micro, small and medium enterprises and for matters connected
therewith or incidental thereto.

The Act came into force from 2nd October, 2006.

It has repealed "Interest on Delayed Payments to Small Scale and Ancillary Industrial
Undertakings Act, 1993".

Key Provisions of the MSMED Act 2006

• It provides the legal framework for recognition of the concept of “enterprise” which
comprises both manufacturing and service enterprise. It defines the term as:
An enterprise is an industrial undertaking or a business concern or any other
establishment, by whatever name called, engaged in the manufacture or production of
goods, in any manner, pertaining to any industry specified in the first schedule of the
Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering
any service or services.
• It broadly classifies the manufacturing and service entities into three tiers, namely, Micro,
Small and Medium.
• It establishes a National Board for Micro, Small and Medium Enterprises. The role of
the Board is to examine the factors affecting the promotion and development of MSMEs,
review the policies and programmes of the Central Government and make
recommendations in regard to facilitating MSMEs promotion and development enhancing
their competitiveness.
• It empowers the Central Government to constitute an Advisory Committee. The role of
the Committee is to give recommendations to the Board, Central and State government on
the matters referred to it.
• It provides for the procedure for the filling of forms for registration under MSME.
• It empowers the Central Government to undertake programmes and issue guidelines and
instructions to promote, develop and enhance the competitiveness of MSMEs.
• It provides provisions for delayed payments to micro and small enterprises.
• It empowers the Central and State government to make rules to carry out the provisions
of the Act.

It should be kept in mind that the State governments are primarily responsible for the promotion
and development of MSMEs within their jurisdictions. However, the Central Government,
through its various initiatives, supplements the efforts of the states. The Ministry of MSME
and its organizations are responsible for helping the States in encouraging entrepreneurship,
employment and livelihood opportunities, and to increase the competitiveness of MSMEs amid
the changing economic scenario.

Let us now discuss these key provisions in detail.

Definition of MSMEs

The Micro Small & Medium Enterprises (MSMEs) are defined in India under the MSMED Act
2006. Micro, Small and Medium Sized Enterprises (MSME) have different definitions across
countries and organizations, based on variables such as the number of employees, turnover,
investment in assets, or a combination of these. According to the World Bank, Micro, Small
and Medium Enterprises (MSMEs) have been defined in terms of number of employees. In
micro enterprises: 1–9 employees; small: 10–49 employees; and medium: 50–249 employees.

The MSMED Act, 2006 defines Micro, Small and Medium Enterprises based on:

1) The investment in plant and machinery for those engaged in manufacturing or

production, processing or preservation of goods and,
2) The investment in equipment for enterprises engaged in providing or rendering of
services.

On 26.06.2020, a new composite criterion of classification for manufacturing and service units
was notified which came into effect on 1st July, 2020. The MSMEs are now classified
according to a composite criterion that includes both their investment and sales turnover.

Let us now know the definitions of MSMEs, both old as well as new so that we can understand
their nature and features.

Old Definition of MSMEs (as per MSMED Act, 2006)

The guidelines with regard to investment in plant and machinery or equipment as defined in
the MSMED Act, 2006 are:
Considering the importance of MSMEs in economic development, the Government focuses on
the promotion of activities and facilities to the businesses that come under the ambit of
MSMEs. The old definition given above was restricting many MSMEs that grew and wanted
to expand further, from taking facilities and privileges provided to them by the Government.
There was a demand from the MSME sector to change this definition. Union Finance Minister,
Ms. Nirmala Sitaraman made the announcement of the new definition of MSMEs saying, “The
decision to change the definition of MSMEs was made mainly because of the low threshold
limit under the old definition of MSMEs”. She further added that the old definition of MSMEs
created a "fear” among them that if they expand further, they may lose the benefits that MSMEs
enjoy. She said this has been "killing the urge to grow" among the MSMEs.

New Definition of MSME

You have already learnt above that the criterion of classification of MSMEs under MSMED
Act, 2006 was based on investment in plant and machinery/equipment. It was different for
manufacturing and services units. It was also very low in terms of financial limits.
Consequently, the Indian MSME sector has been calling for an amendment to the MSME
definition for a long time.

The central government has attempted to revise the definition of MSMEs given in the MSMED
Act, 2006 on two occasions previously. The government introduced the MSME Development
(Amendment) Bill, 2015 which proposed to increase the investment limits for manufacturing
and services MSMEs but this Bill was withdrawn in July 2018 and another Bill was introduced.
The MSME Development (Amendment) Bill, 2018 proposed to use annual turnover as criteria
instead of investment for classification of MSMEs but the 2018 Bill lapsed with the dissolution
of 16th Lok Sabha.

Finally, a new composite classification criterion was approved which was announced by the
Finance Minister Mrs. Nirmala Sitharaman in the Aatmanirbhar Bharat Package on 13th May
2020. The new classification went into effect on 1st July, 2020.
In accordance with the composite criterion of classification the Micro, Small and Medium
Enterprises (MSME) are classified as below:

Key Highlights of the New Classification

As the economy has changed significantly since the enactment of the MSMED Act in 2006, a
revision in the definition was required in order to be realistic with time and to establish an
objective system of classification and to promote ease of doing business. As a result of new
composite criteria of classification for manufacturing and service units:

• There will be no difference between the manufacturing and service sectors.

• In addition to the investment in plant and machinery criteria, a new criterion of turnover
has been added to the previous classification criteria.
• MSMEs will benefit from MSMEs' new threshold limit in many ways, including growth in
size.
• The turnover from exports will not be counted in the limits of turnover for micro, small or
medium units.
• It will benefit the MSME sector by attracting more investments and creating more jobs.

Overall, the new definition of MSMEs is a substantial improvement over the previous
definition and is expected to help these enterprises to face new challenges in a better frame and
help them grow and expand further.

National Board for Micro, Small and Medium Enterprises (NBMSME)

The National Board for Micro, Small and Medium Enterprises was established under the
MSMED Act, 2006. It consists of 47 members including Chairman, Vice Chairman and
Member Secretary. The Minister for Ministry of MSME is the ex-officio chairman of the
NBMSME and the head office of the Board is at Delhi. Subject to the directions of the central
government, the Board should perform all, or any of the following functions:

• Examine the factors affecting the promotion and development of micro, small and medium
enterprises and review the policies and programmes of the Central Government in this
direction.
• Make recommendations for promotion and development of the micro, small, and medium
enterprises and increasing their competitiveness.
• Advice the Central Government on use of the Fund or Funds constituted under Section 12
of the Act.

Advisory Committee

The MSMED Act, 2006 also provides for the constitution of an Advisory Committee for
MSME. The advisory committee comprises five officers of the central government having
experience in matters relating to MSME, three representatives of the state governments and
one representative each from the MSME association. The Member Secretary of the National
Board of Micro, Small and Medium Enterprise is also the Secretary of the Advisory committee.
The role of the advisory committee is as follows:

• The Central Government before classifying any class or classes of enterprise, should obtain
the recommendation of an advisory committee.
• The Central Government may take advice of the advisory committee on matters of:
➢ Promotion and development and enhancing competitiveness of MSMEs;
➢ Credit facility for micro, small and medium enterprises;
➢ Preference policies in procurement of goods and services for micro and small
enterprises;
➢ Administration and utilisation of fund or funds.
• The State government may take advice from the advisory committee to make rules to carry
out the provisions of the MSMED Act, 2006.
• The advisory committee may give recommendations to the Board, Central or State
government on any of the following matters:
➢ Level of employment in a class or classes of enterprises;
➢ Level of investment in plant and machinery or equipment;
 ➢ The need of higher investment in plant and machinery or equipment by the class or
classes of enterprise for technological upgradation, employment generation and
enhanced competitiveness;
➢ The possibility of promoting and diffusing entrepreneurship in MSMEs;
➢ The international standards for classification of SMEs.

Promotion, Development and Enhancement of Competitiveness of MSME

In accordance with MSMED Act, 2006, the following provisions facilitate MSMEs promotion,
development, and enhanced competitiveness.

• In order to facilitate the promotion, development and enhancement of competitiveness of

MSME, the central government may launch programs for:
➢ Development of skills in employees, management and entrepreneurs;
➢ Technological upgradation;
➢ Marketing assistance;
➢ Infrastructure development; and
➢ Cluster development.
• Enactment of progressive credit policies for timely and smooth availability of credit for
micro, small and medium enterprises.
• Formulation of preference policies by Central and State government in respect of
procurement of goods and services for micro and small enterprises,
• Constitution, administration and utilisation of funds by way of grants by central
government for the promotion, development and enhancement of competitiveness of
MSMEs.

Some Other Provisions

The MSMED Act, 2006 also provides for the rules and regulations related to the registration
and delayed payment in MSMEs. They are discussed below:

MSME Registration: According to the MSMED Act, 2006 registration under MSME is
discretionary for a micro or small enterprise (manufacturing or service) and also for a medium
enterprises engaged in providing or rendering of services. It is compulsory for a medium
enterprise engaged in the manufacture or production of goods pertaining to any industry
specified in the First Schedule (IDR Act).
• For registration under the MSMED Act, 2006 the MSMEs entrepreneurs earlier used to file
Entrepreneurs Memorandum Part 1 (EM-I) at District Industries Centres (DICs) before
starting an enterprise, and Entrepreneurs Memorandum Part 2 (EM-II) after
commencement of the operations.
• Since, September 2015 in order to promote ease of doing business the Ministry replaces
EM (I and II) filing with UdyogAadhaar Memorandum (UAM). UAM is an online self-
certification registration system.
• Based on the composite classification criteria of MSMEs notified on 26.6.2020, the
Ministry has also now replaced the process of registration by filing of UdyogAadhaar
Memorandum (UAM), with ‘Udyam’. Now, the existing and prospective MSME
entrepreneurs may do registration online on portal: https://udyamregistration.gov.in.

Delayed Payments: The MSMED Act, 2006 makes provisions for the matters relating to the
delayed payments between the buyers and micro and small enterprise suppliers of goods and
services.

• The Act stipulates that the payments for goods or services have to be cleared by the buyer
in favour of the supplier on or before the date agreed between them. In case of no agreed
date, the payment period should not exceed 45 days from the day of acceptance.
• If, in any case the buyer fails to make the payment, he is also liable to pay interest on the
amount due to the supplier.
• For any dispute related with delayed payment, the concerned party may move to Micro and
Small Enterprises Facilitation Council for redressal.
• To further the objective of the MSMED Act, 2006 Ministry of MSME launched a portal
MSME SAMADHAAN (http://samadhaan.msme.gov.in/) on 30.10.2017. The portal gives
information regarding the delayed payment status of micro and small enterprises. It also
facilitates these enterprise to file related complaints online.